Madoff - Happy 5th Anniversary?

Tales from the tail                                                                                                        Q1 2014

Madoff – Happy 5th Anniversary?

At Multiplicity Partners, we help investors to solve their problems associated with the “long tail” of their impaired
investments. In many private banking portfolios, the majority of such “legacy” positions are feeder funds linked to
Madoff’s Ponzi scheme. What is the current status of these positions, five long years after Bernard Madoff was
arrested?

Let’s start with the most important thing: If you are exposed to Madoff’s fraud case, directly or indirectly via
feeder funds, you must take action NOW. The deadline for registering with the Madoff Victim Fund, a newly
established recovery pool, is on February 28, 2014.

Madoff Victim Fund – a second recovery pool
The recovery of assets for the victims of the massive Madoff Ponzi scheme started in 2009 and is managed by the
liquidator Irving Picard, who was appointed by the US Securities Investor Protection Corporation. In November
2013, a second recovery vehicle for Madoff investors was established by the US Department of Justice: the
Madoff Victim Fund. Its purpose is to distribute funds directly to all victims of Madoff’s crimes and it is run
separately from the liquidator’s initiative which distributes cash to individuals or fund vehicles that were directly
registered with Madoff Securities. While Picard to date has recovered USD 10 billion, the Madoff Victim Fund
presently holds USD 4 billion. The largest part of these assets was recovered through settlements with the
Picower estate and JP Morgan.

The deadline for registering with the Madoff Victim Fund is on February 28, 2014 and most likely it will take
several weeks for you to gather the necessary documentation and complete the formalities. If you act on behalf
of clients, it is your fiduciary duty to take immediate action as there will be substantial and irrecoverable damage
to the value of any Madoff feeder fund positions if you fail to properly file with the Madoff Victim Fund.

To date, most European Madoff investors have not seen a penny of the massive USD 10 billion of assets
recovered by the Madoff liquidator Irving Picard, despite the fact that more than USD 5 billion (incl. advances of
the US Securities Investor Protection Corporation) have already been distributed to direct investors and feeder
funds in 2011 and 2013. In contrast to many US investors, most of Madoff’s European victims were only indirectly
exposed to the fraud through feeder funds (Fairfield, Kingate, Thema, etc.). Most of these funds are still unable to
distribute recovered amounts as they are involved in various legal disputes, in particular regarding claw backs,
and thus resulting in a “dead-lock” situation. Unfortunately, we see little hope that many of these disputes are
resolved in the near future. Some feeder funds set-up in Luxembourg seem to be totally obstructed as investor
protection mostly exists just on paper, but is not enforced by the local courts. None of the service providers, such
as the custody banks, have been held accountable for having acted grossly negligent so far.

               Multiplicity Partners AG • Bodmerstrasse 5 • 8002 Zürich • Switzerland • +41 44 500 45 50 • info@mpag.com

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The most important development for Madoff’s European victims came just in time for the 5 th anniversary of the
revelation of the Ponzi scheme: On November 18, 2013, the Madoff Victim Fund announced to pay out USD 2.35
billion to Madoff’s actual victims, i.e. the ultimate private beneficiaries behind all the layers of feeder funds and
nominee bank accounts. With the settlement of charges against JPMorgan on January 7, 2014, the Madoff Victim
Fund has accumulated a total of USD 4 billion to be distributed to Madoff’s end investors. The distributions shall
be made “as soon as practical”, which usually means that it takes another few years.

Estimating the recovery value
Calculating the expected recoveries for investors and estimating the timing for (further) distributions is still
extremely difficult as the outcome of many lawsuits is totally uncertain. The total loss incurred by victims of the
Madoff fraud under the applicable net equity method is about USD 17.5 billion, which is far less than the
aggregate of all reported Madoff account statements at the end of 2008 that included massive, but fictitious,
profits. So far an astounding USD 14 billion or 80% of the net losses have been recovered by liquidating remaining
assets, claiming back payouts of fictitious profits and through forfeitures in a range of legal actions.

                            Figure 1: Sources of capital to recover the total loss of USD 17.5 billion

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Calculating the claim
One very important aspect in the process of claiming your losses is obviously how they are calculated. Let us
quickly illustrate how this is done under the net equity method (also referred to as “cash in/cash out” method)
that is applied by the Madoff Victim Fund as well as the liquidator Irving Picard. Under this net equity method, a
claim is calculated as any cash deposited by investors less all amounts withdrawn (and thereby eliminating false
or fictitious profits as reported by Madoff). The Madoff Victim Fund further deducts distributions that were or will
be made by the liquidator of the Madoff estate.

                        Figure 2: Illustrative example how to calculate the “actual loss” or claim amount

Note that if you have withdrawn more from your Madoff investments than your invested capital, then you are
considered a “net winner” and are not eligible for compensation under the two main recovery programs. In
contrast, net winners may face a risk of clawbacks by the liquidator or any of the pooling vehicles.

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Reporting the claim
Let us now look at the practical steps that need to be taken. As mentioned above, you will need to act fast to
assure participating in these substantial recovery distributions. The Madoff Victim Fund issued three different
claim reporting forms considering a victim’s relationship to Madoff Securities. Below we present an illustrative
overview of who needs to file what form to the Madoff Victim Fund until February 28, 2014.

                           Figure 3: Investment layers and most relevant Madoff Victim Fund forms

The Madoff Victim Fund’s form “DIR” is only for investors that had an account directly with Bernard L. Madoff
Investment Securities. Form “IND” is more relevant for most Europeans victims as it relates to those investors
that were exposed indirectly via feeder funds or fund-of-funds and, consequently, were several “layers” away
from Madoff. The form “PV”, for pooled vehicles, is to be filed by the management of the feeder funds or fund-of-
funds that had some exposure to Madoff. Note that the Madoff Victim Fund requires you to back up much of the
requested information by attaching copies of various account statements and investment reports. Multiplicity is
happy to assist you in this process.

Making sure that your claim is properly filed is certainly worth the effort, although it might take years for the
distributions to be completed. Should you consider selling your Madoff claims in the secondary market, you will
most probably not get a decent price unless you have accurately documented and filed your net losses prior to
the deadline.

Please do not hesitate to contact us with any questions you may have on the topic of Madoff investments, or any
other impaired investments you may hold.

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About Multiplicity Partners
Multiplicity Partners is an investment boutique dedicated to illiquid and impaired investments. The company acts
as secondary market intermediary and provides advisory solutions such as asset valuations, wind-downs and fund
restructurings.

Since 2009 the team has managed the divestment of various alternative investment portfolios with assets in
excess of USD 2 billion for clients such as institutional investors, banks and asset managers. Over the past five
years, the team has transacted a wide range of complex and illiquid alternative investment funds and ran auction
processes on illiquid single funds or portfolios from below USD 1 million to above USD 300 million in value.
Multiplicity Partners established a strong global network of secondary market participants.

As an independent and management-owned company Multiplicity Partners is able to offer its clients offer flexible
and tailored solutions. Personal accountability of senior specialists assures quality of work, reliability and
attention to details.

The firm was founded in 2010 and is based in Zurich, Switzerland.

Multiplicity Partners is a member of the Financial Services Standards Associations (VQF), a self-regulatory
organization in Switzerland pursuant to the Anti-Money Laundering Act – officially recognized by the Swiss
Federal Financial Market Supervisory Authority (FINMA). The firm is audited by PricewaterhouseCoopers (PwC),
Switzerland.

Contact information
Multiplicity Partners AG
Bodmerstrasse 5                                                                    For enquiries:
CH-8002 Zürich                                                                     Andres Hefti, Partner
E info@mpag.com                                                                    E ah@mpag.com
T +41 44 500 4550                                                                  T +41 44 500 4555

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